06 Jul China’s economy and your money

Q. How much should I care about bad economic news coming from China?
— Investor

A. In this global economy, you’re right to pay attention to what’s happening around the world.

But how much you have to worry about China would depend in part how much investment exposure you have to the country and the economies affected by its growth and stability.

With China now ranked as the second largest economy in the world and fast closing in on the U.S. and the Euro region as a whole, it gets harder and harder to avoid the impact of its economy, said James Sonnenborn, a certified financial planner with RegentAtlantic in Morristown.

“We saw the positive benefits of this in the aftermath of the 2008-2009 financial crisis as China’s expansionary policies helped provide stability and a source of growth to the world economies,” he said.

But lately, Sonneborn said, we’ve been seeing the negative impact of China’s size in the commodities markets as the country shifts away from its industrialization phase and towards a consumer and services economy. This leaves significant overcapacity in a number of sectors and is causing a painful bear market in the prices of many commodities, he said.

“The natural slowing of this massive economy to a more sustainable rate of growth is impacting many of its neighbors and trade partners that make up much of the emerging markets,” Sonneborn said. “This has been a large part of the reason why emerging market stocks have been flat to down for the past five years.”

Sonneborn said the key for China will be how well it manages this transition in the makeup of its economy. While the growth rate has slowed significantly from the past decade or so, it is still going to be at a level that would make any developed economy very jealous, he said.

He said looking forward, there are a number of positives that China has going for it that should make it an attractive investment opportunity with a place in most investor’s portfolio, within reason.

“If you are an investor in emerging markets (EM), what happens in China will have a meaningful impact on how your investments perform given that the country’s stock market makes up approximately 24 to 26 percent of the major EM indexes and this amount will likely grow,” he said.

Until recently, China has restricted foreign investor access to a significant part of its stock market which is referred to as local “A” shares and available only to Chinese citizens and approved domestic institutions, he said.

“As this segment opens to all investors over the next several years, the Chinese stock market will continue to expand its significance in emerging market portfolios,” he said.

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This post was first published in July 2016.